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Jason Alderman

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Knowing Which Financial Records to Save, Toss

Posted: 05/02/2012 4:52 pm

Thank goodness tax season is over. If the memory of hours spent hunting for and organizing paperwork is still fresh in your mind, maybe it's time to do some financial spring cleaning so preparing next year's taxes won't be such an ordeal.

Many people hold onto mounds of receipts and account statements because they're not sure when it's safe to toss them. (By toss, I mean shred -- don't give identity thieves any ammunition.) Here are several cases where you wouldn't want to lack proper documentation:

  • If you're audited by the IRS you must be able to justify deductions, charitable contributions, income, etc.

  • You should keep track of the date, number of shares and price paid for stocks and fund purchases so when you sell you'll only be taxed on profits above this basis amount; also to justify claiming a loss on your taxes.

  • To claim tax credits or deductions for home improvements, such as qualified energy-efficiency upgrades or for medical reasons.

  • If you make nondeductible (after-tax) contributions to an IRA or 401(k) plan, you'll need to prove you've already paid taxes on the amount at withdrawal.

  • You need sales receipts and appraisals should you ever need to file an insurance claim or tap a warranty.

  • Your heirs will need your tax, insurance, banking and investment documents to settle your estate.


Here's how long you should hold onto different kinds of documentation:

For taxes: The IRS has several periods of limitations during which you can be asked to produce records proving income, deductions or credits you claimed:

  • Normally, they have up to three years from the date of your tax return to request documentation.

  • However, if you failed to report income that is more than 25 percent of the gross income shown on your return, the period jumps to six years.

  • If you file a claim for losses from worthless securities, it's seven years.

  • If you don't file a return or file a fraudulent return, there is no statute of limitations.

So, assuming you haven't committed tax fraud, you should probably hold onto back-up documentation for seven years, to be safe. These records include:

  • W-2 and 1099 income forms.

  • Year-end bank and brokerage statements showing interest earned.

  • Receipts, cancelled checks or other proof of payment for expenses you deduct.

  • Home purchase or closing statements, insurance records and receipts for improvements.

  • Homeowners, car and medical insurance claim payouts.

  • Investment statements (stocks, bonds, mutual funds retirement accounts, etc.)

If you're self-employed or claiming deductions for business use of your home, be particularly diligent. IRS Form 552 contains detailed instructions on what to save and for how long.

What you can shred: Save ATM, debit and credit card receipts until you reconcile with monthly statements -- then heave-ho, unless you need as back-up for tax purposes. Keep pay stubs until you've reconciled them with your year-end pay statement, W-2 form and 401(k) statement.

Save bills if they're tax-related (e.g., if you claim a portion of your utilities for a home office); otherwise, you can probably toss them after you know your payment was processed. And save sales receipts and warranties for appliances, electronics and other major purchases and attach to product warranties and owner's manuals, at least until you no longer own or use them.

Long-term document retention: You should hold onto certain documents for even longer than IRS audit requirements. For example:

  • Keep records for investments (stocks, etc.) and major assets (home, car) at least as long as you own them.

  • Save records and tax forms relating to retirement accounts, at least until you've drained their balances. (See my previous blog, "Deadline Approaches for Mandatory IRA Withdrawals.")

  • Toss monthly and quarterly loan statements after receiving year-end summaries, but always retain final payoff notices in case the loan erroneously goes into collection and you need proof.

  • Save all tax returns and attachments (e.g., W-2 forms, Schedule A) indefinitely. The same goes for hard-to-replace personal documents such as birth, marriage and death certificates, divorce, adoption and military discharge papers, will and power of attorney papers.

Different ways to save documents: You can always save actual documents and receipts. But if your goal is to reduce paper clutter, scan copies of documents and save them as PDF files. You can usually download statements and bills from companies' websites as PDF files as well.

For safety's sake, back up electronic "soft copies" on an encrypted flash drive or external hard drive in case your computer crashes. And, if you're worried about fire, theft or other disasters, store additional copies in a safety deposit box or with a trusted friend. Or use an online data back-up service. Some people save such documents as email attachments, but if your email were ever hacked, they'd be at risk.

Recordkeeping is no fun, but compared to the anxiety of tearing the house apart to prepare for an audit, it's a small price to pay.

This article is intended to provide general information and should not be considered legal, tax or financial advice. It's always a good idea to consult a legal, tax or financial adviser for specific information on how certain laws apply to you and about your individual financial situation.

 

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